Seasonal Tendencies

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I see many reasons to be long FX vol but not many reasons to be short.

by Brent Donnelly

July 19, 2024

Funny, but not true.

Current Views

Flat

The Breakout

Before we get started, check out this trading challenge from Gelber. Spectra has no official affiliation with Gelber, but I have known these guys for almost twenty years and thus I am happy to promote their discretionary futures and FX trading competition. I am sure this will be of interest to many of my readers, especially those on the retail and prop side. Looks like fun and you can win $35,000 in prizes and maybe even a trading job at Gelber. Let’s go!

https://www.gelbergroup.com/thebreakout/

FX Vol

We are in a very interesting moment here where the immediate future shows very little uncertainty as disinflation, soft landing, and a September cut from the Fed are pretty much locked in, while the outlook past October/November could not be any more uncertain. We have no visibility on who is running against Trump, or what the election winner’s policies will be (fiscal, tariffs, Fed, etc.)

This, just as we run into the seasonal bottom for FX vol.

Here is a more granular look at the seasonality of the CVIX (FX vol index):

Small down or big up. I have repeatedly compared the current regime to the summers of 2007 and 2014 and the end of 2019 as those were the other times when FX was this moribund. If you look at what happened in 2007 and 2014, the seasonal pattern kicked in, hard.

In the charts above, I show 6-month EURUSD vol, but anything similar looks the same. USDBRL vol, USDBRL spot, etc., whatever. I have not bothered to put the chart for what happened after the vol-abyss in late 2019 because then came COVID.

Any way you look at it, it looks to me to be a good time to own FX volatility. If you have a strong view in the dollar, the strikes you can get offer amazing leverage. A few examples:

6-month 1.1500 EURUSD digital call: 15%

6-month 1.2400 GBPUSD digital put: 19%

6-month 0.5700 NZDUSD digital put: 18%

These are ballpark prices off current spot and are meant as indications to show you how much leverage you can get from totally realistic levels. If you cannot do digitals, there are ways to create similar exposure with spreads.

Calendar

Slow start to next week then Wednesday and Thursday jam packed with high second-tier and low first-tier events. The Bank of Canada is fully priced for another cut while we will be in blackout ahead of the Fed meeting on July 31. The BOJ also meets July 31.

Final Thoughts

This week’s Macro Trading Floor podcast is ready to go. I think it’s a pretty interesting 37 minutes.

The first Ask Me Anything ran this week for Spectra School’s flagship course “Think Like a Market Professional”. In future, we will make the videos private for enrolled students only but in case you are curious, the first one is public. The questions are listed below the video, so you know what you’re getting into before you hit play.

https://www.spectramarkets.com/ask-me-anything15-july-2024/

Do you work at a bank? Do you know the person who runs the analyst program there? Can you help me get in touch with them? “Think Like a Market Professional” is specifically designed with bank analyst programs in mind and would be a great addition to your bank’s training program. It’s useful for anyone in sales, research, or trading. Thanks!

Have a finely feathered weekend.

Funny, but not true.

See interesting and satisfyingly nerdy explanation here.

Is the host of that video Skrillex’s sister?